U.S. "Credit Card" at Risk; Saving Europe from "Islamic Takeover"; From Underdog to Alpha Dog; Billions in U.S. Cash Funding Taliban?; Did Suspect in Norway Have Help?; Ex-IMF Chief Accuser Speaks Out

Aired July 25, 2011 - 17:00 ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

WOLF BLITZER, HOST: All right, Brooke.

Thank you.

Happening now, one week to go and counting -- Democrats and Republicans, they are scrambling to avoid a potentially devastating national default just days after a stunning collapse in the talks. And we've just learned President Obama will address the nation, indeed, the world, tonight.

Also, Norway's deadliest attack since World War II -- ahead, sobering new details about the suspect's day in court, his alleged motive and why he now says he had help.

And a potential price break for air travelers squashed by a number of major commercial airlines.

I'm Wolf Blitzer.

You're in THE SITUATION ROOM.

But first to the desperate race against the clock to secure what President Obama is calling America's national credit card. Just a little more than seven days from now, the country could face unprecedented default if -- if Congress is unable to agree on a deal to raise the nation's debt ceiling. Failure to do so could also downgrade the governor's credit rating, a move the International Monetary Fund now says could be extremely damaging for global economy purposes.

Let's get all the latest on all the angles of this developing story.

Our White House correspondent, Brianna Keilar, is over at the White House.

We've just learned the president will be addressing the nation later tonight.

And our Congressional correspondent, Kate Bolduan, is up on Capitol Hill -- Brianna, first to you.

What's the very latest -- the thinking behind the president's decision to address the nation and the world tonight? BRIANNA KEILAR, CNN CONGRESSIONAL CORRESPONDENT: Wolf, the thought was that the president, at some point, likely today, would have to come out and really put an exclamation point on the end of a very busy day, where we saw House Republicans and Senate Democrats with essentially dueling press conferences, laying out their plans.

Already today, we saw a statement from the White House press secretary, Jay Carney, endorsing Senate Majority Leader Reid's plan. And I'll save the details for my colleague, Kate Bolduan, who will tell you about that in just a moment.

But the president has already rejected House Speaker John Boehner's plan. So tonight, expect him to argue for the importance of moving forward and doing so quickly, talk about the consequences of not coming to some sort of agreement before August 2nd and also to again lay out his endorsement of the Reid plan and his rejection of the Boehner plan. He's rejected the Boehner plan, Wolf, as a short-term increase in the debt ceiling that he has already threatened to veto, even though Republicans are saying that, actually, it's a two-parter, it's not a short-term plan. The president and the White House, they feel that it is, because there isn't a guarantee that a second increase in the debt ceiling would go forward, that we would end up, really, in the same point that we are right now, in a very protracted, chaotic battle, trying to get the debt ceiling increase when the first short-term one would expire, around February or March -- Wolf.

BLITZER: Stand by for a moment, Brianna.

I want to bring Kate Bolduan into this conversation -- and, Kate, walk us through, if you can right now -- these two plans, the differences, the similarities.

Explain what's going on.

KATE BOLDUAN, CNN CONGRESSIONAL CORRESPONDENT: Hey there, Wolf.

Well, after yet another breakdown in negotiations over the weekend, this time between Congressional leaders, now the top Republican in the House, the top Democrat in the Senate, they've unveiled dueling plans -- their solutions for breaking the logjam and raising the debt ceiling.

A lot of detail in here. But what it boils down to is this. To raise the debt ceiling, House Speaker John Boehner, his plan requires two votes.

First you would have $1.2 trillion in cuts now in order to raise the debt ceiling through early next year, then $1.8 trillion in cuts next year to raise the debt ceiling through -- until 2013. And this is only if Congress would approve those cuts.

And that's where Democrats say no way. They don't want to see a second vote next year to raise the debt ceiling, because they fear that we will end up right where we are today, deadlocked. And that's why Senator Harry Reid, his plan calls for only one vote to raise the debt ceiling -- $2.7 trillion in deficit reduction to raise the debt ceiling until 2013. That does not include any cuts to benefits and entitlements or new revenue. And this could also come with the possibility of more cuts next year.

Now, If you want to get a read on just how far apart they are, just listen to how each reacted to the other's plan today.

(BEGIN VIDEO CLIP)

REP. JOHN BOEHNER (R-OH), SPEAKER OF THE HOUSE: I believe that the plan is full of gimmicks. We're not making any real changes in the -- the spending structure of our government. And it doesn't deal with the biggest drivers of our deficit and our debt, and that would be entitlement programs.

(END VIDEO CLIP)

(BEGIN VIDEO CLIP)

SEN. HARRY REID (D-NV), MAJORITY LEADER: The Republicans' short-term plan is a nonstarter in the Senate and in the White House. And certainly, the Democrats in the White House agree whole-heartedly with us. A short-term agreement risks many of the same dire consequences and would be triggered by the default itself.

(END VIDEO CLIP)

BOLDUAN: Now, the fact of the matter is, Wolf, based on early reviews, neither plan looks like it has a good chance of passing the opposing chamber right now.

BLITZER: But as far as you know, they're both going to take up separate votes in the House?

They'll take up the Boehner plan in the Senate. They'll take up the Reid plan.

And then what?

They're going to go into conference and try to figure out some sort of middle ground, which is what they would normally do if they had a lot of time?

They don't have a lot of time right now -- Kate.

BOLDUAN: That's the big question, Wolf. And that's the big factor at the center of all of this. They don't have a lot of time and they need to move both of these, if they so choose, through both chambers of Congress and somehow reconcile them. A big question this evening is how they're going to do that -- Wolf.

BLITZER: Let me go back to the White House.

Brianna Keilar is over there -- Brianna, it looks like these two -- these two plans, there's obviously a Senate plan by the majority leader, Harry Reid, a House plan by the speaker, John Boehner.

Does the White House sort of feel sidelined or left out of this process?

KEILAR: You know, Wolf, I had this question, too. And I talked with one official, who said the president can't be sidelined, he is the president. He has the power of the veto pen. He is the one who says, ultimately, if something moves. Although, of course, I think the thought is that if, at the eleventh hour, Wolf, he was given a plan that could get through Congress, I think the thought is, how could he do anything but sign it?

But certainly, the president and the White -- and the White House, they've been very much in touch with Senate Democrats and the role right now is that Senate Majority Leader Harry Reid is very much the president's lifeline through this at this point. But there's no doubt that constant communication between the president and House Speaker John Boehner has diminished significantly between White House officials and House Republican officials. That's diminished significantly, as well, Wolf.

I spoke with a Republican source who said that phone call between President Obama and House Speaker John Boehner yesterday, it was the president who initiated that phone call. And so far, Wolf, that's the last time they spoke, as far as we know.

BLITZER: Yes. We'll see what happens. We'll, of course, have special coverage beginning at 8:00 p.m. Eastern tonight, leading up to the president's address to the nation. I'll be anchoring our coverage at 8:00 p.m. Eastern. The president is scheduled to speak from the East Room of the White House at 9:00 p.m. Eastern.

Much more coming up.

But let's check in with Jack Cafferty right now.

He's got The Cafferty File -- a big week coming up, Jack.

Lots at stake.

JACK CAFFERTY, THE CAFFERTY FILE: With all of the ugliness surrounding the debt ceiling debate and no end in sight, it's hard to see how anybody can come out on top in this thing. But politics is politics, you know. And it's a high stakes game. And nobody knows the outcome.

But know this -- there will be a huge price to pay for someone. President Obama's reelection hangs in the balance, of course. And he's also aware of that. He desperately wants a deal. But his plans have fallen flat. He's been unable, thus far, to accomplish his grand compromise between the two parties.

House Majority Leader Eric Cantor has blamed President Obama's fixation on next year's election for holding up a deal.

Treasury Secretary Tim Geithner said in an interview yesterday the president's objective is to take the threat of default off the table through the election.

Now that's pretty telling.

But it's not just the president who's worried about his future. Incumbent seats in both houses of Congress are in jeopardy. And because of that, so, too, are the Democratic majority in the Senate and the Republican control of the house of Representatives. There is a lot at stake here and a lot at stake down the road, as well.

And the average American citizen doesn't even have a seat at the table in all of this. "Washington Post" columnist Ezra Klein says so far, Republicans are winning this thing because the debt ceiling cannot be raised without their support. But he points out that according to polls, they don't have popular support behind their position. Members of the Tea Party are not budging on their promises of deep spending cuts and no new taxes. And that's preventing Republican leaders from any sort of compromise.

Democrats, in the meantime, are playing defense. They're hoping to make a deal that avoids an economic disaster and doesn't rock the political boat too much. But the clock is ticking. The world is watching. And so far, that doesn't look like it's going to happen either.

The question is this -- politically, who stands to win or lose the most in the debt ceiling game of Russian roulette, which is what this has devolved into?

Go to CNN.com/caffertyfile and post a comment on my blog.

BLITZER: It's interesting, Jack, that Harry Reid's plan includes no new taxes -- no tax increase, no tax revenue, no ending of the loopholes for billionaires or millionaires or corporate jet owners or anything like that. It's a major, major concession to the Republicans, but they're still rejecting Harry Reid's plan...

CAFFERTY: You know what...

BLITZER: -- because they want to vote, obviously, next year on...

CAFFERTY: John Boehner...

BLITZER: (INAUDIBLE)...

CAFFERTY: -- John Boehner said it also doesn't touch entitlements, which is one of the big pieces of our deficit spending. And he also characterized the rest of the spending cuts in Reid's plan as, quote, "gimmicks," unquote.

BLITZER: Yes. Well, there's a lot of gimmicks...

CAFFERTY: So I mean...

BLITZER: -- there are (INAUDIBLE).

CAFFERTY: -- there's no meat on either bone so far.

BLITZER: Yes. CAFFERTY: It's just -- it's just posturing and politics. They're not cutting spending. We have got to spend less money in this country. We are broke.

Don't they get that down there?

BLITZER: Yes. They do.

But how do you -- how do you achieve it is not an easy process, Jack.

But we'll talk about it.

Thank you.

CAFFERTY: Yes.

BLITZER: All right, we're going to have much more on this story coming up. We're not going away too far.

But other news we're watching, as well, including the suspect in Norway's deadly siege -- did he have any help from the outside carrying out the attacks?

New details are coming out of his appearance in court today.

And could U.S. money be funding -- get this -- the Taliban?

We have details of a disturbing new report that's coming after the break. (COMMERCIAL BREAK)

BLITZER: Authorities have now put the death toll at 76 in Friday's massive blast and shooting in Norway. The brutal siege marking the worst in the country's history since World War II.

Meanwhile, the suspect behind the attack was in court today, defending his alleged motives.

Let's bring in CNN's Michael Holmes.

He's joining us from Norway with the very latest.

What is going on right now -- Michael?

MICHAEL HOLMES, CNN SENIOR INTERNATIONAL CORRESPONDENT: Yes, Wolf, well, right now, they just had this march -- a memorial march this happened over the last couple of hours. A couple hundred thousand people marched with flowers from the -- the city square down here to the cathedral.

In court today, though, it was a -- it was quite an odd sort of situation early on. The media thought they were going to be able to get in. The police didn't want them to come in because they were worried about him making a message to possible co-conspirators.

Let's -- let's show you how the day unfolded, Wolf. (BEGIN VIDEOTAPE)

HOLMES (voice-over): Dozens of journalists from around the world gathered at Oslo's main courthouse for the hearing, many expecting to be in court to see Anders Brevik for the first time.

It wasn't to be. Judge Kim Heger allowed a police request for a closed courtroom because they feared he might try to send a message to any possible co-conspirators.

JUDGE KIM HEGER, OSLO DISTRICT COURT (through translator): References made by the accused in his statements to police and in today's court hearing has given statements that require further investigation including a statement about quote, "two more cells in our organization", end quote. And that such an investigation must be conducted without accused having opportunity to influence or any other way disturber.

HOLMES: Despite admitting to carrying out those attacks, that plea of not guilty could give Breivik the stage he so desperately craves, using his own trial to get his extremists views to an even wider audience. At a news conference the judge said he had remanded Breivik in custody for eight weeks, four of them in solitary confinement and banned him from contact with anyone other than his lawyers. No newspapers, no television and he outlined some of Breivik's chilling motives for what happened last Friday.

HEGER (through translator): Despite that the accused has acknowledged the actual circumstances, he has not pleaded guilty. According to what the court understands, the accused believes that he needed to carry out these acts in order to save Norway and Western Europe from, among other things, cultural Marxism and Muslim takeover.

HOLMES: Judge Heger said Breivik had told investigators he wished to bring a massive loss to the governing Labor Party in Norway for what he called treason, the colonizing of the country by Muslims. After the hearing Breivik spirited away to prison until his next appearance in court in eight weeks time.

The maximum penalty for the crimes Breivik is accused of is life, which in Norway means 21 years. But there is a provision in the law for the most heinous of crimes. A provision that says if the inmate remains after 21 years a danger to society, the sentence can be extended extended indefinitely. Michael Holmes, CNN, Oslo, Norway.

(END VIDEO CLIP)

HOLMES: Yes, so that was the scene outside the court today, Wolf, and -- and -- and there were -- there were probably 200 journalists here from around the world covering this. We also heard from legal sources that -- that -- that Breivik actually thinks that he is going to spend the rest of his life in jail. He doesn't think he's going to be getting out either, Wolf.

BLITZER: What do we know about those individuals and children who are still missing? HOLMES: Yes, that's right. You know, they revised the death toll down as you heard today. But there -- there are still four still missing from the shooting that went on, on the island there.

The police wound up their search on the island, the ground search and -- and they covered every square foot of the place apparently. And -- one of the great hopes was that they would find these missing four.

Yesterday I was out on the water near the island and -- and the reality is that these -- these are probably four people who jumped into the water same as many others did to try to swim to safety and get away from the gunman and they just disappeared. There were at least eight boats out there yesterday looking in the water there and divers in the water.

The -- the Norwegian government actually put a mini sub in the water to try to look for the -- for these missing people, but so far no luck with that. They remain missing and their parents are still up there waiting to hear something too, which is just heartbreaking. I was up there at the hotel where they're having grief counseling there and it's just a heartbreaking scene, Wolf.

BLITZER: Yes, heart goes out to all those people. All right, Michael, thank you. Here in the United States a dramatic new development in the sexual assault case against the former IMF Chief Dominique Strauss-Kahn, the hotel maid accusing him now speaking out for the first time. Let's go to our national correspondent, Susan Candiotti. She has the latest. Susan?

SUSAN CANDIOTTI, CNN NATIONAL CORRESPONDENT: Hi, Wolf, and she has a powerful story to tell. Police say she's been consistent and credible, yet because of admitted lies about her past, prosecutors remain on the fence about taking her case to trial. That's why Nafissatou Diallo says, she's breaking her silence.

(BEGIN VIDEO CLIP)

CANDIOTTI: She was told luxury suite 2806 was empty. Instead hotel maid, Nafissatou Diallo says she saw a naked man appear out of the blue.

NAFISSATOU DIALLO: I was like, I'm so sorry I turned my head. He come to me and grabbed my breasts. No, you don't have to be sorry. I said, stop that, I don't want to lose my job and -

DIALLO: Yes, I was like, stop, stop this, stop this. But he -- he won't say nothing. He keep pushing me, pushing me. I was so afraid. I was so scared.

CANDIOTTI: Especially scared of being fired, she said, even though she's much taller than Strauss-Kahn. Raising questions about why she didn't bite harder to fend him off. UNIDENTIFIED MALE: Why would she do this if she didn't have a gun to her head? Well, the threat of losing her job or the fear of that was just like having a gun to her head.

CANDIOTTI: The maid denies the New York Post story labeling her a prostitute.

DIALLO: I'm not and I've never been called that since I was born. God as my witness, I'm telling the truth from my heart. And God knows that.

CANDIOTTI: By going public does she gain any ground with prosecutors?

HENRY MAZURREK, LAWYER, CLAYMAN & ROSENBERG: The D.A.'S office is not looking for -- they don't take polls as to whether they're going to bring a criminal case. It's not who has the favor of the public. It's a determination really, of whether they have credible evidence to present to a jury and can prove beyond a reasonable doubt that -- that the crime was committed.

CANDIOTTI: In a statement, Strauss-Kahn's lawyers lashed out at Diallo and her civil attorney accusing them of trying to inflame the public. Quote, "The cause of justice here is served only when criminal charges are dropped and this unseemingly circus comes to an end. First, Diallo's attorney shot back in a written statement of his own, quote, "Ms. Diallo was forced to come forward in order to put a face to the brutal crime perpetrated by Dominique Strauss-Kahn.

DIALLO: I want justice. I want him to go to jail.

(END VIDEO CLIP)

CANDIOTTI: For an alleged sex assault victim to speak publicly at this stage, is remarkable. One of Strauss- Kahn's defense tactics is to raise questions about her credibility. He's pleaded not guilty, but he has yet to tell his story and so far, Wolf, no indications that he will.

BLITZER: What a story. All right, Susan thanks very much, Susan Candiotti reporting from New York. There's a new feature at CNN we want to tell you about. CNN TV is now streamed live on CNN.com and via the CNN app for iPad, iPhone and iPod on CNN.com you'll find a larger higher quality video player with HD quality. You can watch us, all of CNN including THE SITUATION ROOM in more places more often. Watching it right now on this iPad right here, it's pretty amazing. Check it out.

They're rolling out the welcome mat for -- in New York for -- get this -- North Korea. Part of what could be a major push to get stalled nuclear talks back on track. And the serious push pull with protestors. The Syrian regime now says it will allow opposition parties. So why do protesters say it's just a ploy, just a lie? Stay with us.

(COMMERCIAL BREAK) BLITZER: We're just getting this into THE SUITUATION ROOM. The president will address the nation -- indeed, the world -- at 9:00 pm Eastern tonight on the debt ceiling crisis, averting federal government defaulting on its financial obligations.

We've now just been told that two minutes -- exactly two minutes -- after the president finishes his remarks, the House speaker, John Boehner, will deliver his remarks. He will address the nation, and indeed, the world. So we'll have some dueling comments later tonight.

Of course, we will have live coverage of here on CNN of both of these addresses. Our coverage will begin at 8:00 pm Eastern, one hour earlier right here on CNN. I'll be anchoring our coverage starting at 8:00 pm Eastern. It's going to be an important night in this whole process.

Lisa Sylvester is monitoring some of the other top stories in THE SITUATION ROOM right now..

Lisa, what else is going on?

LISA SYLVESTER, CNN CORRESPONDENT: Hi, there, Wolf.

In Texas, jury selection began today in the trial of polygamist sect leader Warren Jeffs. He's accused of sexually assaulting two underage girls.

Back in 2008, authorities raided Jeffs' ranch and removed 400 children who they feared had been sexually abused. Most of the children have been returned since to their families.

And the US is trying to push the restart button on stalled nuclear disarmament talks with North Korea. Secretary of State Hillary Clinton says North Korea's vice foreign minister and former top nuclear envoy will be in New York this week for exploratory discussions. Six-nation talks on North Korea's controversial nuclear program broke down in 2008.

And after months of anti-government protests and unrest, Syria's cabinet is approving a law allowing the formation of opposition political parties, provided they adhere to, quote, "democratic principles." The ruling Baath Party had banned opposition groups since its 1963 military coup. Activists called the move, though, a little more than window dressing, and they say the political crackdown continues, Wolf.

BLITZER: Lisa, thanks very much.

As the president and lawmakers try to bridge a partisan budget divide before time runs out, just how much does the United States really borrow? Where is all that money going? We're breaking it down for you. And Hillary Clinton does some damage control in China. But can she keep worried allies' fears in check as the U.S. debt debacle drags on?

(COMMERCIAL BREAK) BLITZER: I'm Wolf Blitzer in Washington. Stories we're working on for our next hour: As the debt stalemate drags on here in Washington, are uou beeter off trading your hard-earned greenbacks for gold? We're taking a hard look at what you should be doing with your dollars right now.

The fight over the debt ceiling isn't the only showdown happening here in the nation's capital, but could this one mean cheaper airline fares for you.

And Congressman David Wu, first, he e-mailed a picture of himself in a tiger suit, now, he's facing sexual misconduct accusations and pressure to resign. You're in the SITUATION ROOM.

Thus, how far does the federal budget stretch and where is the mountain of debt facing the United States coming from? Let's break it all down penny by penny with our own Tom Foreman. He's over at the down the wall (ph). All right. Break it down for us, Tom.

TOM FOREMAN, CNN CORRESPONDENT: Wolf, you know, this is the Rubik's cube that they're trying to sort out on the White House and up on the hill. This is a dollar spent by the United States government right now. Six percent of it is interest on the debt over here. Twenty percent is defense discretionary spending. It's all spent for defense. Ninety percent nondefense discretionary. Fifty-five percent is mandatory spending.

This is money that we have to spend because our own legislation says we have to provide these programs. This is where those entitlement programs are. John Boehner was talking about earlier that there's been so much discussion on Social Security, Medicare, Medicaid. You add these up, you get close to 74 percent, 75 percent of the mandatory spending is in those programs.

But over here into the nondiscretionary defense spending, here you have social services, transportation, veterans benefits, justice from international affairs, things like that, and then 44 percent other. So, figuring out how you squeeze money out of this is all part of the equation, because as long as these debts keep mounting up over here, there's only be spend more that were taking in, and our deficit rises like this. It gets higher and higher.

That adds to the collective debt, which right now is right at $14 trillion. Now, when I widened out there and I want you to look at the important part of this. This is the dollar we're spending right now and where it's all going, but the simple truth is 40 cents out of every dollar we're spending right now is borrowed money. This is what has Washington scared. Forty cents is borrowed.

And if we see in the coming years what we expect to see, which is an increase in those entitlement programs because the population gets older and older, then, what you're likely to see as a result is over here, even if we lower the debt in effect by increasing the ceiling. It's the same debt, but we've given more head room on it. If we keep spending the way we are, and we don't come up with some other way to produce revenues, then what happen is the deficit keep pushing this up, and we just close in on another debt ceiling.

The fear is that this becomes an even bigger portion of this, which means the interest in the previous graphic gets bigger and bigger. The bottom line, Wolf, this is as they said the beginning a bit of a Rubik's cube right now and depending on which party you're in, with point of view have. No matter which piece you move, another piece is going to move accordingly, and there will be backlash -- Wolf.

BLITZER: All right. Thanks very much, Tom Foreman for that. Almost everyone agrees it's a very, very bad situation. The debt limit battle may be seriously tarnishing the United States' image around the world as well. Let's find out a lit bit more on what's going on from our foreign affairs correspondent, Jill Dougherty. Jill, as I've been saying repeatedly and I can't stress it enough, not only are Americans watching what's going on, the whole world is watching.

JILL DOUGHERTY, CNN FOREIGN AFFAIRS CORRESPONDENT: Absolutely, Wolf. And you know, here are the two words U.S. diplomat used with me. This diplomat said concern and disbelief. That is countries around the world looking at the brinkmanship that's going on here in Washington, D.C. over raising the debt limit, and listen to what Michael Bloomberg, the mayor of New York City says. Friends are watching the spectacle with amazement. Foes are watching it with glee.

(BEGIN VIDEOTAPE)

DOUGHERTY (voice-over): From Russia to Australia to Brazil. The world is nervously watching the U.S. Congress try to thrash out a debt ceiling agreement. Secretary of State, Hillary Clinton, in Hong Kong doing damage control, admitting it can be a messy process but --

HILLARY CLINTON, SECRETARY OF STATE: This is how an open and democratic society ultimately comes together to reach the right solution. So, I'm confident that Congress will do the right thing and secure a deal on the debt ceiling and work with President Obama to take the steps necessary to improve our long-term fiscal outlook.

DOUGHERTY: China, the country that holds eight percent of America's debt, 1/3 of that held by foreign entities according to the commerce department has been mostly silent about the crisis. But, a U.S. diplomat tells CNN, we really look bad abroad. And the state department, according to its spokeswoman, is doing a lot of explaining.

VICTORIA NULAND, STATE DEPARTMENT SPOKESWOMAN: A lot of countries find our system hard to understand. So, those are the kinds of questions we get, how long will this go on, are you confident that there'll be an agreement?

DOUGHERTY: But so far, at least, the world doesn't seem to be freaking out, says one economic expert. U.S. interest rates have not risen as they would if other countries wanted to ditch their U.S. treasury bonds, and that's a sign, this expert says, they're not as worried as it might seem.

JOSEPH GANON, PETERSON INSTITUTE FOR INTL. ECONOMICS: The ultimate test of whether foreigners are concerned or not is whether they keep the treasuries or not. And they're voting with their feet by staying. They're not leaving. They're staying in the U.S. market.

(END VIDEOTAPE)

DOUGHERTY (on-camera): At least, so far. All bets are off, however, if the U.S. actually does end up defaulting. And that's something leaders in both sides, however, in this debate are vowing simply won't happen -- Wolf.

BLITZER: All right. Thanks very much. Jill Dougherty is over at the state department.

Battling for Iowa. Republican presidential candidate, Tim Pawlenty, taking new swipes against one of his toughest competitors, Michele Bachmann. Could it earn him a spot at the top of the critical state poll?

Plus, he's not even officially running yet, but what did Texas governor, Rick Perry, say that could potentially cost him votes with conservative voters out there?

(COMMERCIAL BREAK)

BLITZER: Republican presidential hopefuls are gearing up for an important early test in the important early caucus state of Iowa. On August 13th, the Ames Straw Poll will test the candidate's popularity and could be a sign of their electability. And as CNN's chief political correspondent, Candy Crowley, reports, the stakes are especially high for one candidate.

(BEGIN VIDEOTAPE)

CANDY CROWLEY, CNN CHIEF POLITICAL CORRESPONDENT (voice-over): Former Minnesota governor, Tim Pawlenty, is a serious experienced politician, affable, articulate and not doing at all well in the Republican presidential race.

Sometimes, when you look at the way the race has gone so far, if you think what is it? Is there an X-factor here that I'm missing?

TIM PAWLENTY, (R) PRESIDENTIAL CANDIDATE: Well, I think the X-factor, of course, is people initially get buzz or impact around the media impression, but over the long haul, people look for that impression to be not just somebody who's loud, not just somebody who's entertaining but can they really be president of the United States.

CROWLEY: The long haul is getting short. In less than a month, Pawlenty needs to show some game in the Ames Straw Poll. He languishes in state polls a distant third. He is thought to be spending about $1 million on his straw poll effort. He has camped out in Iowa, staking claim on the ground and in the air, running as an underdog.

The rap is that Pawlenty has no instinct for the jugular, too nice, too vanilla, too go along-get along. Of late, he's been tuning up, though, taking swipes at his most troublesome competitor, fellow Minnesotan, Michele Bachmann, and her lack of executive experience.

PAWLENTY: There hasn't been somebody who went from the U.S. House of the Representatives to the presidency, I think, in over 100 years and there's a reason for that.

CROWLEY: Bachmann, a tea party fave, whose campaign boomed right out of the box issued a press release responding, "real world actions speak louder than the words of career politicians." It's all relatively mild stuff, but in a primary, you don't want to be so tough on a Republican opponent you alienate their supporters. But when it comes to a president from the opposite party, primaries are a perfect time to exercise one's inner alpha male.

PAWLENTY: Where's the president of the United States on the most pressing financial challenges of our country on entitlement reform? Where is his specific Medicaid reform proposal? Where is his specific Medicare reform proposal? Where is his Social Security reform proposal? The answer is, he doesn't have one. You can't find him publicly talking about that. He's ducking, he's bobbing, he's weaving. He's not leading and that's not the kind of president we need, and that's why he needs to be removed from office.

CROWLEY: As Tim Pawlenty steps up his rhetoric, he got some welcome news from Ohio, he placed second in a straw poll there of activist, just ahead of Michele Bachmann and behind Mitt Romney. Ohio isn't Iowa, but until August, it will do.

Candy Crowley, CNN, Washington.

(END VIDEOTAPE)

BLITZER: Texas governor, Rick Perry, has some advice on same-sex marriage. Stay out of state's rights issues, but will that stance cost him some potential White House cohesive support? Stand by.

And the debt war needs campaign ad wars. You're in the SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: Let's get right to our "Strategy Session." Joining us, our CNN political contributor, the Democratic strategist, James Carville, and Republican strategist, Terry Holt. Guys, thanks very much for coming in. Terry, the polls show that Democrat and the president are doing a little bit better than the Republicans on this whole debate over raising the nation's debt ceiling.

Here's the question, why does John Boehner want another vote next year in the middle of campaign season if it hurts the Republicans right now more than it's hurting the Democrats?

TERRY HOLT, REPUBLICAN STRATEGIST: So that he can get this debt ceiling raised in time for this default to be averted. I don't think many politicians would like to go through this process twice, but for the good of the country, I think he's developed this two-step process so that we can get an interim plan in place that lowers the debt of the country while it raises the debt ceiling, and we continue talking until the first of the year. Most politicians wouldn't want to have to go through this during an election year, but that's the reality we face.

BLITZER: You mean to say he's not strong enough in the House of Representatives to bring his own party along? Is that what you're saying, Terry?

HOLT: I'm saying that raising the debt isn't strong enough to get through the House of Representatives without plenty of strings attached and plenty of commitment to make sure that we cut spending and cut the cost of this government so we don't go bankrupt.

BLITZER: How much of the blame, James, does the president deserve for this debacle that's happening right now, a week before the debt ceiling has to go up?

JAMES CARVILLE, DEMOCRATIC STRATEGIST: Well, I don't know. It seems that they can't surrender. They keep trying to wave a white flag, and they keep rejecting them. I don't know how you can blame (ph) him. This is a complete and utter and total Republican route. In my 30 years in politics, I've never seen one party trying up like the Republicans have. I mean, that's few things that they wanted with wars and tax cut, and now, they're getting students and elderly people and the environment to pay for it. It's really remarkable.

BLITZER: He makes a good point, Terry, because Harry Reid's proposal includes no tax increases, no tax revenue. They've given up on that with the Republicans saying no new taxes, and Harry Reid and the White House says they'd support Harry Reid's proposal. Agrees, you know what, go for it.

HOLT: Well, shocking, the American people don't want their taxes raise and they want Washington to get serious about cutting the debt. OK, we're doing that. We're making progress. But you still have to put the votes together and you still have to get agreement and go through this process. I think the Republicans are winning. I agree with James, but they're not there yet. It's going to be a long process.

BLITZER: James, how worried should the president and the Democrats, for that matter the Republicans as well be -- I don't know if you saw Tom Friedman's column in the "New York Times" yesterday about potentially a third way of moving up a third party gaining steam getting ready for next year. Thoughts on the Democrats and the Republicans.

CARVILLE: First of all, I just completely disagree that there's any sense of equivalency here. And the public does, too, by the way. Seventy percent -- 70-20, they blame the Republicans, 43 to 48, they blame the president. It's no way equal. Sometimes, there's a tendency just to equate everything. The Republicans are winning everything. They will not let the Democrats surrender. And, I think the public is seeing this play out, if you will, Wolf.

And look, people are -- they're seeing one party wanting to surrender, the other side wanting to default, and they're probably not that pleased with either one. So, something could happen here.

BLITZER: If there's a third party that emerges along the lines, let's say, of Ross Perot, both of you guys remember what happened in 1992. Terry, does that, in effect, guarantee Barack Obama's re-election?

HOLT: No, I don't think anything at this point guarantees Barack Obama's election. You know, in this current process, the American people definitely want this over. They want this debt ceiling debate to go away, but the devil is in the details, and if they find out it's been done the wrong way, then everyone who participated in that process is going to pay a price at the polls.

In my view, I think a third party is extraordinarily difficult to organize in this country. We've been a two-party system for a very long time. There is a substantial tea party movement in this country, but I don't see that actually forming into a third party.

BLITZER: It may not be, James, as difficult as it used to be in this age of social networking and the internet.

CARVILLE: No, it could happen. By the way, the public does want tax increases. Overwhelmingly they want a combination of tax increase and spending cuts.

HOLT: I haven't seen it.

CARVILLE: I mean, overwhelmingly. Not close like 65 percent.

HOLT: If people are clamoring to have a higher tax bill --

(CROSSTALK)

CARVILLE: I want to just be clear. The public overwhelmingly supports a combination of revenue increase and spending cuts. Not even close.

HOLT: As long as it's not coming out of their pocket, right James?

CARVILLE: Again, by just won't set the record straight. You make a very good point. It may be much easier -- the other thing they can do is a third-party candidate can tag on to an existing party that has ballot access. Just because you run on the green party or reform party or something like that doesn't mean that you can't change that around. All things are possible right now, and I think the country is very frustrated. I don't -- there's nothing I would like saying I couldn't imagine that happening.

BLITZER: We'll leave it on that note, guys. Thanks very much, James Carville and Terry Holt.

Disturbing new signs. Get this. Billions of U.S. dollars could be winding up in the hands of the Taliban. A new D.O.D. report coming up.

And Congressman David Wu, first he e-mailed a picture of himself in a tiger suit, now, he's facing sexual misconduct accusations and serious pressure to resign. We'll have the latest.

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BLITZER: Now, a chilling new indications that billions, yes, billions of dollars in U.S. cash could actually be in the hands of the Taliban. Our Pentagon correspondent, Barbara Starr, is following this story for us, following the money, if you will. What's going on here, Barbara?

BARBARA STARR, CNN PENTAGON CORRESPONDENT: Look, Wolf, it seems like we are standing here every week chatting about another case of corruption in the war zone. This time, a military review of a trucking contract, a $2 billion-plus trucking contract in Afghanistan that moves more than 70 percent of the goods and materiel that U.S. troops need at their remote fire bases, moves it all across Afghanistan. The military in Kabul looked at this $2 billion plus contract and found payoffs and corruption.

One U.S. official telling us, and we quote from what he explained to us, that when they looked at it, there were concerns about, quote, "fraudulent paperwork and behavior, indications dollars were flowing to criminals and the enemy." What we are talking about is a web of payoffs.

The contractors who run the trucking companies, hire subcontractors, the subcontractors then pay off police and security officials who pay off the Taliban or criminals so that their trucks get safe passage across insurgent zones in Afghanistan. Is it realistic at this point that any of this will ever change? We spoke to a top analyst about all of this.

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LISA CURTIS, SENIOR FELLOW, HERITAGE FOUNDATION: When you have the, you know, extent of corruption that we may have seen with some of these contracts, that's clearly not acceptable, and they have to change the way they are doing business, but, you know, like I said, you know, it's unrealistic to think that something like this would not happen given the influence of the Taliban, the fact that they are intimidating the population every day.

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STARR: One Afghan police commander took $3.3 million in payoffs and distributed to insurgents in the form of weapons, explosives and cash. According to U.S. officials, $3.3 million, wolf, in U.S. taxpayer money -- Wolf.

BLITZER: Yes. It's a lot of money coming on the heels of that inspector general's report last week, billions of dollars winding up in the hands of bad guys in Afghanistan. It's pretty shocking. All right. Barbara, thanks very much.

Let's go back to jack for the "Cafferty File." How does that make you feel, Jack, knowing that taxpayer dollars, your money, winding up in Afghanistan in the hands of the Taliban? JACK CAFFERTY, CNN CONTRIBUTOR: Makes me feel exactly how you might imagine it makes me feel. The question this hour has to do with the debt crisis in Washington. Politically, who stands to win or lose the most in the game of debt ceiling Russian roulette?

Gary in Arizona, "The extremes of both parties, liberals on the democratic side, tea party hard-liners on the republican right. Ultimately, both parties will come away from this little dustup looking like uncompromising knuckleheads. And frankly, that's exactly what they are, starting with the guy in the oval office and right on down the political ladder."

Dan in Kentucky writes, "The losers will be the middle income Americans who really have no representation in Washington, people who got an education, stayed out of legal trouble, got jobs that pay enough to support their families and pay their taxes. They're not the millionaires, and they're not the poor or the working poor who pay no income taxes but then complain if anything is cut."

Jerry in Georgia writes, "Politically, who knows? Probably both sides will claim victory no matter what the outcome. Who will really win with capping spending? My grandchildren."

Virginia in Georgia writes, "President Obama and next the Democratic Party stand to win. I doubt many of the new Republicans House members will be back after the next election. Most voters don't want people who sign pledges to unelected groups and then choose that pledge over the good of the people who put them in office."

Pat in New Jersey writes, "I believe both parties will lose because the people of this country are fed up with the inability of our leaders to understand the meaning of compromise. I also feel the Republican Party is so focused on bringing this presidency to a halt they can't see that their antics are going to cause irreversible damage to our economy. Maybe, we should have had the leaders of the NFL come in to get things done. At least, they're willing to work together to solve their problems."

Lisa in Connecticut writes, "Political and financial opportunists win the most from debt chaos. American taxpayers and their taxpaying children and grandchildren will lose the most whether we default or allow the debt ceiling to rise. At least, the war on the middle class is going well."

And Barbara writes, "Didn't you see "the deer hunter," Jack? Nobody wins in Russian roulette.

If you want to read more on this, go to my blog, CNN.com/caffertyfile -- Wolf.